S.J. Grand > Fraud Cases > Did you hire a sham? A case study about multiple frauds in a Chinese Representative Office

Did you hire a sham? A case study about multiple frauds in a Chinese Representative Office

Somebody wants to take direct personal advantage from you, even when you think to have everything under control. And often, “the weakest point is the most trusted local manager”, observes Stephane J. Grand. Frauds, indeed, are always committed for a reason that can be felt by any person inside a company, at any level; it’s a personal or financial need that stimulates an employee to commit a crime. The need finds ground to grow in the vast majority of companies, especially in distant subsidiaries where control is feeble, communication is irregular, and protocols aren’t observed. In addition, among other factors, China’s weak legal system, cultural differences, complex language, and intricate supply chain structure make foreign enterprises’ business a highly defenseless target for self-serving people.

The first case study of our series shows that often employers just hire the wrong person, trusting him/her on the experience and market knowledge. Usually, the fact that China is “so different”, leads foreign business owners to hand all the responsibilities to whom they deem “capable” just because of his/her origins or ability to speak the Chinese language. On top of that, leaving the freshly new Chinese entity completely unmonitored will most likely cause big troubles. Solutions and preventive measures to avoid scams happening are to be promptly taken, no matter what’s your budget.

Case details

Among many other Western companies blinded by the glittering light of the Chinese boom, a Midwestern manufacturer of high-tech building supplies decided to break into the market by opening a Beijing Representative Office. As some years ago the real estate market in China was exploding, the smart and legit aim of this US company was to aggressively tackle the sector.

To pursue the aim, the company poached a high-level manager from a competitor in the U.S.A., hoping to achieve results thanks to his knowledge and skills. The Chief Representative looked perfect:

25 years of working experience in the industry;

a U.S. passport;

Chinese origin.

But all that glitter is not gold…

The guy was therefore sent to Beijing to establish the Representative Office. As soon as this was open, the manager persuaded the mother company to launch a second branch in the pulsating Shanghai. You can tell that Shanghai was his hometown: he claimed to have a powerful strong network there.

The U.S. mother company hired S.J. Grand as it suspected something was going very wrong: costs were too high, and sales proceeds were not coming in as they thought they would. Plus, the Chinese manager divorced his 25-year wife to marry the young and pretty receptionist.

S.J. Grand’s investigation, including a review of cash and HR cycles, yielded that the Shanghai office was only staffed with the Chinese manager’s family members, who were everywhere except in the office during working hours. While the Beijing office was overstaffed with employees of dubious interest.

There were sales, but they belonged to a company founded by the Chinese manager’s new young wife, who convinced the elder husband to buy her a mansion in Indianapolis. Taking advantage of the husband’s U.S. passport, the young lady was living in a house they couldn’t have normally afforded. She was managing her China-based entity that was selling the products imported by the US Representative Office under the guise that “it was easier to use a Chinese distributor”. She acted smart: she was paid on contracts signed, not on the amounts collected. Those contracts were showing the U.S. company owner’s false signature, copied when he asked the Representative Office to help him getting a Chinese visa.

When reviewing the Representative Office’s expenses, S. J. Grand found out that there was a majority of personal expenses coming from the Chief Representative: clothes, shoes, home and kitchen appliances, cocktails, travels, hotel rooms, etc. These expenses were realized abroad by the manager’s wife, who was incautiously using his credit card to have the lifestyle she was dreaming about when in China. Our team found out that there was more than RMB 2 million of fictitious expenses, as well as RMB 4 million worth of genuine expenses that were just not related to the company’s operations.

In this case of fraud in a Chinese company, there were relevant issues, among which:

Cash Skimming: discrepancies between cash count and account balance;

Expense: repeated entertainment expenses with no association to the business;

S.J. Grand produced a comprehensive fraud report, documenting every aspect of the deceitful behavior, as well as the total loss caused to the US mother company.

The company, under S. J. Grand Team’s advice, sued the Chief Representative and his wife in the U.S.A. The Beijing Representative Office and the Shanghai entity closed down.

The client established a new legal entity in China after a short while. Having grown wise to the need for strong internal controls, it hired S. J. Grand to set up the system, which has been operating successfully since then.

WAYS TO PREVENT FRAUD ACCORDING TO THIS CASE STUDY

You must adopt anti-fraud preventive measures to avoid wasting money on remedies or lawsuits. Safeguard your company before it’ll be too late.

According to the case study presented, control must be improved. How?

Segregation of Duties: at least two employees are responsible for separate parts of the same task. For example, in the payroll, one person can be responsible for the accounting part and the other one for the signing checks part;

Job rotation: periodically changing the person in charge of one same task;

Applicants’ screening when hiring: ethics and values should also be considered even if they’re hard to catch from a simple job interview;

Employee monitoring: software can help with this;

Surprise audits: don’t tell them (the employees) everything, surprise them before a disaster happens.

“If you see your manager changing life habits, something may be happening”, warns Stephane J. Grand.

To obtain further corporate advisory, feel free to drop us a line. S. J. Grand make it simple to win over fraud in Chinese companies.

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